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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF
THE SECURITIES EXCHANGE ACT OF 1934
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HEI, INC.
(Name of Subject Company)
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HEI, INC.
(Name of Person Filing Statement)
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COMMON STOCK, PAR VALUE $.05 PER SHARE
(INCLUDING THE ASSOCIATED COMMON STOCK PURCHASE RIGHTS)
(Title of Class of Securities)
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404160103
(CUSIP Number of Class of Securities)
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EUGENE W. COURTNEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HEI, INC.
P.O. BOX 5000
1495 STEIGER LAKE LANE
VICTORIA, MINNESOTA 55386
(612) 443-2500
(Name, Address and Telephone Number of Person
Authorized to Receive Notice and Communications
on Behalf of the Person Filing Statement)
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COPIES TO:
DEANNE M. GRECO
Moss & Barnett, A Professional Association
4800 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4129
(612) 347-0287
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is HEI, Inc., a Minnesota corporation (the
"Company"), and the address of its principal executive offices is P.O. Box 5000,
1495 Steiger Lake Lane, Victoria, Minnesota 55386. The title of the class of
equity securities to which this Statement relates is the common stock, $.05 par
value per share (the "Common Stock"), of the Company and the associated common
stock purchase rights (together with the Common Stock, the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER
This Statement relates to the tender offer by Fant Industries Inc., a
Delaware corporation ("Bidder") formed by Mr. Anthony J. Fant, described in a
Tender Offer Statement on Schedule 14D-1, dated March 10, 1998 (the "Schedule
14D-1"), to acquire up to 467,886 Shares (or such greater number that will equal
11.5% of the Shares outstanding as of the date that Shares are accepted for
payment) at a price of $8.00 per Share, net to the seller in cash, without
interest thereon, upon the terms and subject to the conditions set forth in the
Offer to Purchase, dated March 10, 1998 (the "Offer to Purchase"), and the
related letter of transmittal (which, together with the Offer to Purchase,
constitute the "Offer" and are contained within the Schedule 14D-1).
According to the Schedule 14D-1, the purpose of the Offer is to increase the
equity interest of the Bidder and Mr. Fant in the Company and to support their
efforts to gain control over the management, operations and assets of the
Company.
As set forth in the Schedule 14D-1, the principal executive offices of the
Bidder are located at 2154 Highland Avenue, Birmingham, Alabama 35205.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing this
statement, are set forth in Item 1 above.
(b) Certain contracts, agreements, arrangements and understandings between
the Company or its affiliates and its executive officers, directors or
affiliates are set forth under the captions "Shares and Principal Shareholders,"
"Directors' Fees," "Directors' Stock Options," "Approval of Increase in Number
of Shares Authorized for 1989 Omnibus Stock Compensation Plan," and "Executive
Compensation" in the Company's proxy statement dated December 5, 1997, relating
to the Company's 1998 Annual Meeting of Shareholders. The relevant sections of
the proxy statement are attached hereto as Exhibit 1 and incorporated herein by
reference.
Except as described in this Item 3(b), there are no material contracts,
agreements, arrangements or understandings, or any potential or actual conflicts
of interest between the Company or its affiliates and the Company, the Bidder or
any of their respective executive officers, directors or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) At special meetings held on March 13 and March 18, 1998, the Board of
Directors of the Company (the "Board") met with the Company's legal advisers,
Moss & Barnett, A Professional Association ("Moss & Barnett"), and Faegre &
Benson LLP, to review the terms and conditions of the Offer. Piper Jaffray Inc.
("Piper Jaffray") also attended the March 13, 1998 Board meeting. The Board and
the Company's legal advisers had previously met on February 19 and March 2, 1998
to consider Mr. Fant's accumulation of Shares and met on March 6, 1998 to
consider Mr. Fant's announced offer.
Following the Board meeting on March 2, 1998, at the request of Mr. Fant's
representative, three members of the Board, Eugene W. Courtney, the Chief
Executive Officer of the Company, Robert L. Brueck and William R. Franta, and
the Company's legal advisers met with Mr. Fant, a representative of
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Mr. Fant's financial adviser, R.J. Steichen & Co. ("Steichen"), Mr. Fant's
counsel and other advisers. Mr. Fant proposed that the Board size be increased
by the Board to seven without shareholder action, that one of the current
directors resign and that the Board appoint Mr. Fant and three other nominees of
Mr. Fant to the Board, thereby giving Mr. Fant control of the Board. In response
to questions, Mr. Fant did not provide any meaningful information about himself,
his plans and proposals for the Company or the identity of his proposed
nominees, but indicated that he would provide further information at a later
date upon the written request of the Company. Members of the Board indicated
that they were willing to consider any proposals that might be in the best
interests of all of the Company's shareholders and that they would appreciate,
and would make a written request for, further information from Mr. Fant.
On March 3, 1998, Richard Heise contacted Deanne M. Greco, a shareholder at
Moss & Barnett and the Company's principal outside counsel. Mr. Heise
represented that he was the head of mergers and acquisitions at Steichen and
indicated that he was concerned that the Company had retained Faegre & Benson
LLP as special counsel to advise it in connection with Mr. Fant's stock
accumulations and that if a negotiated change of control did not occur, Mr.
Courtney and Jerald H. Mortenson, the Company's Chief Financial Officer, could
lose their jobs. He further stated that Steichen, together with Mr. Fant,
controlled enough Shares to determine any proxy contest and suggested that Ms.
Greco meet separately with him. Ms. Greco declined.
On March 4, 1998, without prior notice to the Company and prior to the
Company's written request for further information, the Bidder issued a press
release announcing its Offer. Mr. Fant called Mr. Courtney that morning to
advise him of the announcement.
In response to the Company's written request on March 5, 1998 for further
information concerning the Offer and Mr. Fant's and his associates' backgrounds
and ideas for the Company, Mr. Fant responded in writing on March 5, 1998 that
further information about the Offer would be provided no later than Tuesday,
March 10th and that "[w]e will also furnish additional information about
ourselves and our plans in a timely manner in accordance with applicable laws."
The Company received a copy of the Bidder's Schedule 14D-1 on March 10th and has
received no additional information about Mr. Fant's plans for the Company or his
slate of nominees. The Company's correspondence dated March 5th, Mr. Fant's
response and a letter from Mr. Fant to Mr. Courtney dated March 6, 1998, are
included in their entirety in the Offer to Purchase of the Bidder. Mr. Fant's
Friday, March 6th letter states that he understood that he and Mr. Courtney
would meet that day. The Offer to Purchase omits the following letter which was
sent by facsimile to Mr. Fant on the morning of Monday, March 9, 1998.
9 March 1998
Mr. Anthony J. Fant, President
Fant Industries Inc.
2154 Highland Avenue
Birmingham, Alabama 35205
Re: Your letter of March 6, 1998
Dear Mr. Fant:
I regret any confusion regarding the possibility of a face-to-face meeting, and
the fact that circumstances have prevented such a meeting to date. As stated in
my letter last Thursday, I would have, indeed, preferred to meet and discuss the
situation prior to your issuance of a tender offer.
As mentioned in our earlier conversation on the subject, it was my hope that we
might meet--perhaps as early as this past Friday--to review your responses
regarding your proposed board members and other plans for HEI. We had not,
however, set a time or date for such a meeting. As I now understand it, these
responses will not be complete and available to us until sometime this week.
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Further, as you may well imagine, the tender offer itself creates obligations on
our part that require, when added to the other immediate demands on my time, my
full and complete attention for the near term.
With the insight gained from the information that you will be supplying shortly,
it may be mutually desirable to set a future time and place to meet, however.
Sincerely,
Eugene W. Courtney
The Board has not gained any insight from the information included in the
Offer as to why Mr. Fant should be given control of the Board, one of many
conditions to the Offer. On March 16, 1998, Mr. Fant suggested a meeting at a
mutually agreeable time to discuss a change of control of the Company and Mr.
Courtney responded on March 20, 1998 that, as stated previously, the Board would
require information in writing regarding Mr. Fant's plans and strategies for the
Company prior to any further discussions.
FOR THE REASONS SET FORTH BELOW, THE BOARD DOES NOT BELIEVE THAT THE OFFER
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT
THE HOLDERS OF SHARES REJECT THE OFFER AND NOT TENDER ANY OF THEIR SHARES
PURSUANT THERETO.
A copy of a letter to shareholders communicating the Board's recommendation
and a form of press release announcing such recommendation are filed as Exhibits
2 and 3 hereto, respectively, and are incorporated herein by reference.
(b) In reaching its conclusions, the Board considered a number of factors,
including those described in paragraph (a) above and the following:
(i) THE OFFER IS FOR ONLY 11.5% OF THE OUTSTANDING SHARES, BUT IS
CONDITIONED ON BOTH A CHANGE IN CONTROL OF THE BOARD AND REDEMPTION OF THE
RIGHTS ISSUED UNDER THE COMPANY'S RIGHTS PLAN.
The Offer is for only 11.5% of the outstanding Shares and, if successful,
would increase Mr. Fant's direct or indirect stock ownership to less than 30%.
Nevertheless, the Offer is expressly conditioned, among other things, on Mr.
Fant's gaining control of the Board and redemption by the Board of the Rights
issued to shareholders under the Company's Rights Plan. Among the primary
purposes of the Rights Plan, described in Item 8(a), are protection of all
Shares held by all shareholders against unequal treatment and avoidance of a
transfer of control of the Company without giving all shareholders the
opportunity to receive a control premium with respect to all of their Shares.
THE BOARD'S STRONG PREFERENCE IS THAT ANY SALE OF CONTROL OF THE COMPANY INVOLVE
A MERGER, TENDER OFFER FOR ALL SHARES OR OTHER TRANSACTION THAT ENABLES ALL
SHAREHOLDERS TO RECEIVE A CONTROL PREMIUM FOR ALL OF THEIR SHARES.
The Offer to Purchase, however, states that the Bidder has no present
intention to seek to acquire all of the Shares of the Company or to consummate a
merger or other business combination transaction between the Company and the
Bidder. Mr. Fant will be able to control the Company if the conditions are
satisfied and the Offer is completed even though he will directly and indirectly
own less than 30% of the outstanding Shares. SUCH CONTROL, WITHOUT PAYMENT OF
FULL VALUE FOR ALL OF THE SHARES, WAS OF MAJOR CONCERN TO THE BOARD.
(ii) IF THE OFFER IS COMPLETED, MR. FANT WILL HAVE PURCHASED SHARES AT
DIFFERENT PRICES, ENABLING HIM TO ACQUIRE CONTROL OF THE COMPANY AT AN AVERAGE
PRICE PER SHARE OF $6.81 FOR LESS THAN 30% OF THE SHARES.
If successful, Mr. Fant will have acquired control of the Company while
paying $8 per share for only 11.5% of the Shares. Moreover, of the 734,900
Shares recently acquired by Mr. Fant in open market purchases, 594,900 shares,
or 14.6% of the outstanding Shares, were acquired prior to any public disclosure
by Mr. Fant of his Share ownership or intent to obtain control, at an average
price of $5.77 per Share (including brokerage commissions). He then acquired an
additional 140,000 Shares, increasing his ownership to 18.1% of the outstanding
Shares, at an average price of $7.29 per Share, before announcing the $8 per
Share Offer for 11.5% of the outstanding Shares. If the Offer is completed at $8
per Share for the
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additional 11.5%, he would have purchased an aggregate of 29.6% of the
outstanding Shares at an average price per Share of $6.81, and, if his
conditions are satisfied, obtained control of the Board of Directors.
(iii) THE FUTURE OPPORTUNITY TO SELL TO MR. FANT SHARES NOT PURCHASED IN THE
OFFER WILL BE LIMITED, AND FUTURE SALES ON THE OPEN MARKET MAY BE ADVERSELY
AFFECTED IF THE OFFER IS COMPLETED.
Since Mr. Fant already has acquired more than 10% of the outstanding shares
of the Company without seeking to obtain or obtaining the approval of a
committee of disinterested directors of the Company, he is prohibited by
Minnesota law, as discussed in more detail in Item 8(b)(2), from effecting a
merger or other business combination of the Company with his affiliates or
associates until February 2002. Consequently, even if Mr. Fant desires to engage
in a business combination transaction that would be in the best interests of the
remaining shareholders, he is prohibited under Minnesota law from doing so for a
period of nearly four years. Moreover, Mr. Fant has not indicated any intent to
acquire additional Shares on terms substantially equivalent to the Offer or to
buy more than 11.5% of the Shares pursuant to the Offer. Under Minnesota law, he
cannot acquire additional Shares for two years following the last purchase of
Shares pursuant to the Offer unless shareholders are afforded a reasonable
opportunity to dispose of Shares on terms substantially equivalent to the Offer
or unless a committee of all disinterested directors approves of the subsequent
purchases before any Shares are purchased in the Offer, as described in more
detail in Item 8(b)(3). There can be no assurances that Mr. Fant would be
willing to purchase additional Shares at the Offer price.
Sales by shareholders of Shares other than to Mr. Fant could be adversely
affected by the Offer. There can be no assurances that shareholders will have
another opportunity to participate in a transaction with a control premium,
particularly because Mr. Fant, as nearly a 30% shareholder, is likely to be able
to defeat or discourage unsolicited takeover offers if he does not desire to
sell the Company.
With respect to possible open market sales by shareholders, completion of
the Offer would eliminate an additional 11.5% of the Company's Shares, in
addition to 18.1% already owned, directly or indirectly, by Mr. Fant, from
trading on the open market (presuming that Mr. Fant did not sell the Shares) and
would reduce by an additional 11.5% the percentage of Shares held by
non-affiliated shareholders. This could reduce trading volume, which is already
limited. Moreover, as stated in the Offer:
"[I]t is possible that the number of beneficial holders of the
Shares may significantly decrease if Purchaser acquires 467,886 or more
Shares pursuant to the Offer. . . . If, as a result of the purchase of
Shares pursuant to the Offer or otherwise, the Shares no longer meet the
requirements of the NASD for continued inclusion in the Nasdaq National
Market or in any other tier of the Nasdaq Stock Market, and the Shares
are no longer included in the Nasdaq National Market or in any other
tier of the Nasdaq Stock Market, the market for Shares could be
adversely affected."
THEREFORE, THE PURCHASE OF SHARES PURSUANT TO THE OFFER MAY ADVERSELY AFFECT THE
LIQUIDITY AND MARKET VALUE OF THE REMAINING SHARES HELD BY THE PUBLIC.
(iv) THE VALUE OF THE REMAINING SHARES (IN EXCESS OF 70% OF THE OUTSTANDING
SHARES) THAT WOULD NOT BE OWNED BY MR. FANT AFTER THE CONSUMMATION OF THE OFFER
WOULD IN LARGE PART BE SUBJECT TO THE PERFORMANCE OF MR. FANT AND HIS CHOSEN
DIRECTORS.
Because of the limited amount of Shares that would be purchased in the Offer
and the restrictions under Minnesota law on future mergers and stock
acquisitions involving Mr. Fant, as discussed in more detail in Item 8(b), the
Board was concerned that the value of the remaining Shares that would not be
owned by Mr. Fant after the consummation of the Offer (in excess of 70% of the
outstanding Shares) would in large part be subject to the performance of the
Company under the management of Mr. Fant and his chosen (but unidentified)
directors, presuming that they gained control of the Company prior to the
completion of the Offer in satisfaction of the change-in-control condition.
However, despite the Board's requests, Mr. Fant has not provided the Board or
the Company's shareholders with any meaningful
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information concerning his qualifications or the identity or qualifications of
any potential nominees of Mr. Fant to operate the business. THIS WAS OF
PARTICULAR CONCERN TO THE BOARD BECAUSE IT DOES NOT APPEAR THAT MR. FANT HAS
OPERATED ANY BUSINESS COMPARABLE TO THE BUSINESS CURRENTLY CONDUCTED BY THE
COMPANY.
Moreover, despite the Board's requests, Mr. Fant has not provided the Board
or the Company's shareholders with any meaningful information concerning his
plans or proposals for the Company. The Offer to Purchase indicates that he
intends to (1) explore ways to deploy the Company's assets more productively,
(2) seek to increase the utilization and operating efficiency of the Company's
recently expanded facility in Victoria, Minnesota, and (3) seek to stabilize the
Company's cash flows.
These are very general objectives that the Board has pursued and continues
to pursue, in addition to other strategic objectives. Current management of the
Company has brought the Company out of near bankruptcy in 1990 to a position of
financial stability, with $13 million in cash and equivalents and shareholders'
equity that has grown from only $1.1 million at the end of fiscal 1990 to $17
million at the end of fiscal 1997. Since 1990, annual sales have grown from
under $9 million to $31 million in fiscal 1997. For the five-year period of 1986
through 1990, the Company had a pre-tax loss of $4.8 million, while during the
seven-year period of 1991 through 1997, the Company generated pre-tax profits of
$18.1 million on sales of $134.4 million for a pre-tax return of 13.5%. During
the same period, the Company has expanded and upgraded its facilities, equipment
and capacity at a cost of $11 million, half of which was funded by internal cash
flow and half of which was funded through favorable industrial revenue bond
financing. The Board is well aware that this strong performance would not have
occurred without capable and experienced management and that such management
remains a key factor in the Company's continuing success.
Mr. Fant in his Offer has not explained to the Board or the shareholders how
he intends to accomplish his objectives for the Company except to say that he
intends to conduct a detailed review of the Company and consider and determine
what, if any, changes would be desirable. THE BOARD QUESTIONS WHY IT WOULD BE IN
THE COMPANY'S OR THE SHAREHOLDERS' INTERESTS TO HAVE MR. FANT COMPLETE THE OFFER
AND BE HANDED CONTROL OF THE COMPANY IF MR. FANT AND HIS UNNAMED BOARD NOMINEES
HAVE NOT DETERMINED THAT THEY WOULD MAKE ANY CHANGES.
(v) THE OFFER IS HIGHLY CONDITIONAL AND IT IS UNLIKELY THAT THE CONDITIONS
WILL BE SATISFIED BY APRIL 7, 1998, IN WHICH EVENT THE BIDDER HAS THE ABSOLUTE
RIGHT TO WITHDRAW THE OFFER.
The condition contained in the Offer to Purchase that Mr. Fant gain control
of the Board is a self-imposed condition that would not otherwise have been
necessary to complete the Offer and obtain full rights with respect to the
acquired Shares. Moreover, that condition cannot be satisfied by April 7, 1998
unless the Board voluntarily abdicates control of the Board to Mr. Fant, an
18.1% shareholder, without a shareholder vote or, possibly, if the Board
immediately calls a special shareholder meeting and immediately completes and
files a proxy statement with the SEC and receives the SEC's prompt response.
Under Minnesota law, however, the Board is not required to hold such a meeting
to consider removal of directors until 90 days after the shareholders have
properly demanded such a meeting, and no shareholder demand had been received as
of the close of business on March 19th.
The Offer also contains a condition that the Rights issued under the Rights
Plan be redeemed. As discussed in Item 8(b)(1), however, that requirement should
not be necessary to complete the Offer if Mr. Fant does not intend to acquire
30% or more of the Company's Shares, unless Mr. Fant intends to engage in
certain self-dealing transactions that, if engaged in by a 20% shareholder,
would trigger the dilutive effect of the Rights Plan.
The Offer to Purchase also is conditional on the acquisition of Shares in
the Offer being approved in accordance with the requirements of the Minnesota
Control Share Acquisition Statute (or otherwise being determined by the Bidder
to be inapplicable or not having the effect of denying voting rights). However,
no meeting has been requested by the Bidder to vote on the approval of voting
rights for shares to be acquired in the Offer as of the close of business on
March 19, 1998, and the Offer to Purchase does not state that
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any such meeting will be demanded. As further provided in Item 8(b)(1), such a
meeting need not be held until 55 days after proper demand is made by the
Bidder.
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In addition to these conditions, the Offer to Purchase contains numerous
other conditions that may not be satisfied if the Board takes certain actions
that may be in the best interests of the Company and its shareholders. Those
conditions are set forth in Item 12 of the Offer to Purchase. GIVEN THE HIGHLY
CONDITIONAL NATURE OF THE OFFER, THE BOARD QUESTIONS WHETHER THE OFFER WILL BE
COMPLETED.
(vi) SHAREHOLDERS MAY BE ENTITLED UNDER FEDERAL SECURITIES LAWS TO RECEIVE
MORE INFORMATION ABOUT THE OWNERSHIP OR CONTROL OF SHARES BY STEICHEN AND ITS
OFFICERS AND DIRECTORS BEFORE DETERMINING WHETHER TO TENDER THEIR SHARES IN THE
OFFER.
The Board was concerned that the involvement of Steichen in the Offer and
its previous involvement with Mr. Fant, particularly in view of Mr. Heise's
indication that Steichen, together with Mr. Fant, controls sufficient Shares to
determine the outcome of a proxy contest, may constitute Mr. Fant and Steichen
as a "group" under federal securities laws. If so, the shareholders are entitled
under federal securities laws to receive more information about the ownership or
control of Shares by Steichen and its officers and directors before determining
whether to tender Shares in the Offer. Moreover, if Mr. Fant and Steichen are
acting as a group for purposes of acquiring, owning or voting Shares, the total
voting power of all Shares owned by them cannot exceed 20% of the outstanding
Shares without the requisite shareholder vote under the Control Share
Acquisition Statute described in Item 8(b)(1), and information regarding both
must be included in the Information Statement. In addition, if they are acting
as a group or Steichen is otherwise participating in the Offer, Steichen will
also be limited, for two years after the last purchase of Shares pursuant to the
Offer, from acquiring further Shares without offering at least the $8 per share
price to selling shareholders, presuming that the disinterested committee of the
Board does not approve the subsequent purchases prior to any purchases under the
Offer. Finally, if Mr. Fant and Steichen are deemed to constitute a group such
that they beneficially own each other's stock, the Board believes that Mr. Fant
would be deemed to beneficially own more than 30% of the outstanding Shares
after completion of the Offer, thereby triggering the exercisability of the
Rights of all shareholders other than Mr. Fant, Steichen and their affiliates
and associates, to purchase Shares at one-half price under the Rights Plan
described in Item 8(a)(1). THE BOARD WAS CONCERNED THAT THE POSSIBILITY THAT MR.
FANT AND STEICHEN WOULD BE DEEMED TO CONSTITUTE A GROUP WOULD DECREASE THE
LIKELIHOOD THAT MR. FANT WOULD COMPLETE THE HIGHLY CONDITIONAL OFFER OR WAIVE
HIS CONDITION THAT THE BOARD REDEEM THE RIGHTS UNDER THE RIGHTS PLAN.
(vii) THE BOARD WAS CONCERNED ABOUT THE TIMING OF THE OFFER AND ITS POSSIBLE
IMPACT ON THE PLANS AND PROSPECTS OF THE COMPANY.
The Board was concerned that the Offer may be timed to take advantage of
recent setbacks of the Company. Since 1991, the Company has had only one loss
quarter, the first quarter of fiscal 1998, and cash flow has continued to be
positive throughout this period. The Company has recently resumed profitability
and is in the process of adding key new and highly experienced management team
members, with a goal of resuming growth and expansion. The Board was concerned
that by conditioning his Offer on taking control of the Company, Mr. Fant may be
jeopardizing these plans and the prospect that all shareholders will share in
such growth and expansion. Moreover, while the Board is not opposed to a
transaction that would benefit all shareholders, the Board also was concerned
that any such transaction at the present time may not be optimal for the
shareholders, given the Company's recent performance and its plans and
prospects.
FOR ALL OF THE FOREGOING REASONS, THE BOARD DOES NOT BELIEVE THAT THE OFFER
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND RECOMMENDS THAT
THE HOLDERS OF SHARES REJECT THE OFFER AND NOT TENDER ANY OF THEIR SHARES
PURSUANT THERETO.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Piper Jaffray attended the Board's meeting on March 13, 1998. The Board is
considering retaining Piper Jaffray, as financial adviser, but has not yet
determined the scope of such engagement, executed an engagement letter, or
negotiated the fees that would be payable to Piper Jaffray.
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Neither the Company nor any other persons acting on its behalf currently
intends to employ, retain or compensate any other person to make solicitations
or recommendations to shareholders on its behalf concerning the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) No transactions in the Shares have been effected during the past 60 days
by the Company or, to the knowledge of the Company, by any executive officer,
director, affiliate or subsidiary of the Company, other than grants of options
to purchase the Shares.
(b) To the knowledge of the Company, none of its executive officers,
directors, affiliates or subsidiaries presently intends to tender Shares
pursuant to the Offer or otherwise sell any Shares that are owned beneficially
or held of record by such persons.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) The Company is not engaged in any negotiation in response to the Offer
that relates to or would result in (i) an extraordinary transaction, such as a
merger or reorganization, involving the Company or any subsidiary of the
Company; (ii) a purchase, sale or transfer of a material amount of assets by the
Company or any subsidiary of the Company, except as hereinafter set forth in
this Item 7(a); (iii) a tender offer for or other acquisition of securities by
or of the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company. The Company is in the preliminary stages of
discussions concerning the possible acquisition of a material amount of assets
from an unrelated third party. No decision has been made by the Board of
Directors to make a proposal to acquire the assets and there is no assurance
that the third party would agree to a proposal from the Company to acquire the
assets even if the Company made such a proposal. The possible acquisition of
assets referred to in this Item 7(a) was under consideration prior to the
commencement of the Offer by the Bidder and therefore the Company does not deem
it to be in response to the Offer.
Notwithstanding the foregoing, it is possible that the Board may in the
future engage in negotiations in response to the Offer that could have one of
the effects specified in (a) above and the Board has determined that disclosure
with respect to the parties to, and the possible terms of, any transactions or
proposals of the type referred to in this Item 7(a) might jeopardize any
discussion or negotiations that the Company may conduct. Accordingly, the Board
has adopted a resolution instructing management not to disclose the possible
terms of any such transactions or proposals, or the parties thereto, unless and
until an agreement in principle relating thereto has been reached. There can be
no assurance that any such further discussion or negotiations will be undertaken
or that any such transactions will be recommended to the Board or shareholders
of the Company or that any transaction that may be recommended will be
authorized or consummated.
(b) There are no transactions, Board resolutions, agreements in principle or
signed contracts in response to the Offer that relate to or would result in one
or more of the matters referred to in paragraph (a) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION
(a) THE COMPANY'S RIGHTS PLAN
As of May 27, 1988, the Board of Directors of the Company declared a
dividend of one Right for each Share outstanding on June 10, 1988 or that shall
become outstanding after June 10, 1988 and prior to the earliest of the
Distribution Date, the Redemption Date and the Final Expiration Date, each as
defined below. Each Right entitles the registered holder to purchase from the
Company one-fourth Share at a price of $6.00 per one-fourth Share (the "Purchase
Price"), subject to adjustment. The Rights were issued
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pursuant to a rights agreement dated as of May 27, 1988, as amended by
amendments dated as of June 10, 1988 and as of March 13, 1998 (the "Amendments")
(as so amended, herein called the "Rights Agreement"). Among the primary
purposes of the Rights Plan are protection of all Shares held by all
shareholders against unequal treatment and avoidance of a transfer of control of
the Company without giving all shareholders the opportunity to receive a control
premium with respect to all of their Shares.
As a result of the March 13, 1998 Amendment, the Rights will not be
exercisable until the earlier of ten business days (subject to extension at the
discretion of the Board, except that the Board may not extend the date to a date
later than the first business day after the first trading day on or after the
date on which the Rights would have been exercisable, in the absence of the
extension, on which the closing price of a Share exceeds four times the Purchase
Price per one-fourth Share) following (i) a public announcement that, subject to
certain exceptions, a person (including the person's affiliates and associates
and all persons acting in concert with such person) has acquired beneficial
ownership (as defined in the Rights Agreement) of 20% or more of the outstanding
Shares (and has thereby become an "Acquiring Person" as defined in the Rights
Agreement) or (ii) the commencement or public announcement of a tender offer or
exchange offer which would result in a person becoming the beneficial owner of
30% or more of the outstanding Shares (the "Distribution Date"). The Rights will
expire on June 10, 1998 (the "Final Expiration Date") unless earlier redeemed by
the Company as described below.
Until the Distribution Date, the Rights are evidenced with respect to any
Share certificates outstanding as of June 10, 1988, by such Share certificates
with a copy of the Company's Summary of Rights attached thereto. The Rights
Agreement provides that, until the Distribution Date, the Rights will be
transferred with and only with the Share certificates, with or without the
Summary of Rights attached thereto. Certificates for Common Stock that become
outstanding after June 10, 1988 contain a notation referencing the Rights
Agreement. Until the Distribution Date, the surrender for transfer of any Share
certificates, with or without a copy of the Company's Summary of Rights attached
thereto, will also constitute the transfer of the Rights associated with the
Shares represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights will be
transmitted to holders of record of Shares as of the close of business on the
Distribution Date and such separate certificates will evidence the Rights.
The Purchase Price payable, and in certain events the number of shares or
other securities or property issuable, upon exercise of the Rights is subject to
adjustment from time to time in the event of (i) a stock dividend on, or a
subdivision, combination or reclassification of, the Shares, (ii) the grant to
holders of the Shares of certain rights, options or warrants to subscribe for
Shares or convertible securities at less than the current market price of the
Shares or (iii) the distribution to holders of the Shares of evidences of
indebtedness or assets (excluding regular periodic cash dividends at a rate not
in excess of 125% of the rate of the last cash dividend theretofore paid or
dividends payable in common shares) or of subscription rights or warrants (other
than those referred to above).
In the event that (1) the Company is the surviving corporation in a merger
or other combination with an Acquiring Person or any of its affiliates or
associates and either the Acquiring Person then owns less than 40% of the
outstanding Shares or the outstanding Shares are not changed or exchanged, (2)
an Acquiring Person engages in one of a number of self-dealing transactions
specified in the Rights Agreement, or (3) any person acquires 30% or more of the
outstanding Shares without prior approval of the Board, proper provision will be
made so that each holder of a Right other than those then or previously
beneficially owned by the Acquiring Person or any of its affiliates or
associates will thereafter have the right to receive upon exercise thereof at
the then current Purchase Price multiplied by the number of one-fourth shares
subject to the Right that number of Shares having a market value of two times
the product of the Purchase Price multiplied by the number of one-fourth shares
subject to the Right. Upon the occurrence of any of the transactions referred to
in this paragraph, any Rights that are or were at any time beneficially owned by
an Acquiring Person will become void if such Acquiring Person, after becoming an
8
<PAGE>
Acquiring Person, engaged in any of the self-dealing transactions or received
the benefits thereof or acquired at least 30% of the outstanding Shares without
approval of the Board of Directors.
In the event that the Company is not the surviving corporation in a merger
or consolidation with an Acquiring Person or any of its affiliates or associates
after an Acquiring Person has acquired 40% or more of the Company's Shares (and
outstanding Shares are changed or exchanged in such merger or consolidation), or
if more than 50% of the Company's consolidated assets or earning power is
transferred in one or more transactions to an Acquiring Person except in the
ordinary course of business, proper provision will be made so that each holder
of a Right (other than the Acquiring Person or its affiliates or associates)
thereafter has the right to receive upon the exercise thereof, at the then
current Purchase Price multiplied by the number of one-fourth Shares subject to
the Right, that number of shares of common stock of the Acquiring Person or
other acquiring entity which at the time of such transaction would have a market
value of two times the product of the Purchase Price multiplied by the number of
one-fourth shares subject to the Right.
No adjustment in the Purchase Price will be required until cumulative
adjustments require an adjustment of at least 1% in such Purchase Price, three
years elapse from the date of the transaction that would otherwise require the
adjustment or the Rights are about to expire. Fractional Shares need not be
issued in the discretion of the Company and, in lieu thereof, an adjustment in
cash may be made based on the market price of the Shares on the last trading
date prior to the date of exercise.
At any time prior to ten business days after a public announcement by
management of the Company or an Acquiring Person that (subject to certain
exceptions) a person and its affiliates and associates and all persons acting in
concert with such person beneficially owns 20% or more of the outstanding shares
of Common Stock of the Company, subject to extension by the Board of Directors
prior to such public announcement or not later than the last to occur of the ten
business days following such public announcement or the last date specified
during such ten business day period, the Company may redeem the Rights at a
price of $.05 per Right (the "Redemption Price"). Immediately upon the action of
the Board of Directors of the Company ordering the redemption of the Rights (the
"Redemption Date"), the right to exercise the Rights will terminate and the only
right of the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, has no rights as a
shareholder of the Company, including, without limitation, the right to vote or
to receive dividends.
For purposes of the Rights Agreement, a "person" includes an individual,
firm, corporation, partnership or other entity or association, and "beneficial
ownership" includes the following:
(i) shares beneficially owned by such person or any of its affiliates or
associates, directly or indirectly;
(ii) shares which such person or its affiliates have the right to acquire
(other than those tendered pursuant to a tender or exchange offer until
accepted for tender or exchange) or the right to vote (other than a
general exception for revocable proxies solicited in a proxy
solicitation);
(iii) shares which are beneficially owned directly or indirectly by any other
person with which the person or its affiliates or associates has any
agreement, arrangement or understanding (subject to an exception in
connection with underwritten public offerings) for the purpose of
acquiring, holding, voting (other than a general exception for
revocable proxies solicited in a proxy contest) or disposing of
securities of the Company.
The foregoing summary of the Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the Rights
Agreement as set forth as an exhibit to the Company's Registration Statement on
Form 8-A filed May 31, 1988, as amended by Form 8 filed on June 27, 1988, and as
amended by the Company's Registration Statement on Form 8-A/A-2 filed on March
19, 1998, copies of
9
<PAGE>
which may be obtained by requesting such information from the Company at P.O.
Box 5000, 1495 Steiger Lake Lane, Victoria, Minnesota 55386, telephone number
(612) 443-2500.
(b) STATE TAKEOVER LAWS
Minnesota has enacted corporate statutes designed (1) to limit voting rights
of acquiring shareholders unless holders of a majority of outstanding
disinterested voting shares approve of the voting rights, (2) to protect the
assets of the corporation from self-dealing transactions with a substantial
shareholder and (3) to increase the likelihood that all shares will be treated
equally in a takeover. Those statutes are described below:
(1) CONTROL SHARE ACQUISITION STATUTE
Section 302A.671 of the Minnesota Business Corporation Act (the "Control
Share Acquisition Statute") generally provides that a shareholder (or group of
shareholders acting pursuant to any written or oral agreement, arrangement,
relationship, understanding, or otherwise for the purposes of acquiring, owning
or voting the shares) who acquires beneficial ownership of stock constituting
20% or more of the voting power of the outstanding stock of any Minnesota
corporation with 100 or more shareholders or a publicly held Minnesota
corporation, such as the Company, with 50 or more shareholders (the "Issuing
Public Corporation") cannot vote more than 20% of the total voting power of the
outstanding stock of that corporation unless voting power with respect to the
shares in excess of 20% is approved by holders of (i) a majority of all shares
of the corporation entitled to vote and (ii) a majority of all shares, excluding
"interested shares," entitled to vote. Similar limitations on voting rights are
imposed at the 33 1/3% and 50% stock ownership thresholds such that even if the
shareholders by majority vote and majority vote of holders of shares, other than
interested shares, approved of an acquiring shareholder's voting of shares in
the 20% to 33 1/3% range, a subsequent vote would be necessary if the
shareholder acquired or proposed to acquire additional shares which would
increase its beneficial ownership to 33 1/3% or more in order to vote more than
33 1/3% of the outstanding voting power of the stock. For purposes of the
Control Share Acquisition Statute, interested shares are those beneficially
owned by the acquiring shareholder (in this case Mr. Fant and the Bidder), any
officer of the Issuing Public Corporation and any employee of the corporation
who is also a director of the corporation.
The Control Share Acquisition Statute applies to each Issuing Public
Corporation unless otherwise provided in articles of incorporation or bylaws
approved by the shareholders of the Issuing Public Corporation. Neither the
Company's articles of incorporation nor bylaws contain such a provision. While
there is an exception from the shareholder voting requirement for cash tender
offers for all shares of voting stock of the corporation that are pre-approved
by a committee of disinterested directors and that would result in the acquiring
shareholder becoming the owner of more than 50% of the voting stock of the
Issuing Public Corporation, that exception would not apply to the Offer, which
is for only 11.5% of the common stock of the Company and would result in Mr.
Fant's beneficial ownership of less than 30% of the Shares. If any acquiring
shareholder, such as Mr. Fant, desires to require the Issuing Public Corporation
to call a special meeting of shareholders to attempt to obtain full voting
rights under the Control Share Acquisition Statute for shares beneficially owned
or to be owned by the acquiring shareholder, the acquiring shareholder must
first deliver an information statement (the "Information Statement") to the
Issuing Public Corporation, together with copies of definitive financing
agreements with responsible financial institutions, or other entities having the
necessary financial capacity, for any financing of the stock acquisition not to
be provided by funds of the acquiring shareholder and a written undertaking to
reimburse the Issuing Public Corporation's expenses of the meeting, other than
those expenses incurred in opposing the approval of voting rights for the
shares. The Information Statement must include information regarding the
identity and background of the acquiring shareholder, plans and proposals of the
acquiring shareholder concerning the corporation and certain other specified
information. If such information and undertaking is provided, the Issuing Public
Corporation, within ten days after receipt of the Information Statement, must
call a special meeting of the shareholders of the Issuing Public Corporation to
be held on
10
<PAGE>
a date no later than 55 days (unless the acquiring shareholder agrees to a later
date) after receipt of the Information Statement and the written undertaking to
pay meeting expenses. If the Information Statement and any required financing
agreements are provided but a special meeting is not requested, the issue of
whether to approve voting rights must be submitted by the Issuing Public
Corporation at the next shareholders meeting of which notice has not previously
been sent and which occurs at least 55 days after the receipt of the Information
Statement and definitive financing agreement.
If any acquiring shareholder, such as Mr. Fant and the Bidder, does not
provide an Information Statement within ten days after crossing the 20% stock
ownership threshold, or if the Issuing Public Corporation's shareholders vote
not to approve full voting rights for the acquiring shareholder, the Issuing
Public Corporation, unless otherwise provided in its articles of incorporation
or bylaws approved by its shareholders, can redeem the shares of the acquiring
shareholder in excess of the 20% threshold at a price equal to their average
closing sale price during the 30 trading days prior to the date of the call for
redemption. The call for redemption must be given by the Issuing Public
Corporation within 30 days after the event giving rise to its right to call for
redemption. Neither the Company's articles of incorporation nor its bylaws
modify this provision.
For purposes of the Control Share Acquisition Statute and the Business
Combination Statute described below, "beneficial ownership" generally includes,
without limitation, the direct or indirect, sole or shared power, through any
written or oral agreement, arrangement, relationship, understanding or
otherwise, to vote, or direct the voting of, shares of stock or to dispose, or
direct the disposition, of shares, except that tendered shares are not
beneficially owned by the offeror until accepted for purchase. The definition
further provides that when two or more persons act or agree to act as a group
for the purposes of acquiring, owning, or voting shares of a corporation, all
members of the group are deemed to constitute a "person" and to have acquired
beneficial ownership, as of the first date they so act or agree to act together,
of all shares beneficially owned by any of them.
(2) BUSINESS COMBINATION STATUTE
Section 302A.673 of the Minnesota Business Corporation Act (the "Business
Combination Statute") generally provides that an Issuing Public Corporation such
as the Company that is or has been publicly held may not engage in any business
combination (and may not vote, consent or otherwise act to authorize a
subsidiary of the Issuing Public Corporation to engage in a business
combination) with, or proposed by or on behalf of, or pursuant to a written or
oral agreement, arrangement, relationship, understanding or otherwise with, an
"Interested Shareholder" for four years after the Interested Shareholder most
recently became an Interested Shareholder. For purposes of the Minnesota
Business Combination Statute, an Interested Shareholder generally includes,
among other persons, any person that beneficially owns 10% or more of the voting
power of the outstanding shares entitled to vote of the Issuing Public
Corporation. The Bidder and Mr. Fant are Interested Shareholders under this
definition. While there is an exception from the four-year moratorium if the
business combination or acquisition of the 10% ownership interest is approved by
a committee of all disinterested members of the Board of Directors of the
corporation before the 10% stock acquisition occurs, Mr. Fant did not seek such
approval and, in fact, did not even notify the Board of Directors of the Company
of his stock ownership until after he crossed the 10% threshold. Therefore,
presuming that Mr. Fant remains a direct or indirect beneficial owner of 10% or
more of the outstanding shares of the Company or an affiliate or associate of
the Company and that the Company remains an Issuing Public Corporation, the
Company cannot engage in a prohibited business combination until February 2002.
For purposes of the Business Combination Act, a business combination
prohibited during the four-year moratorium generally includes the following
transactions and other specified self-dealing transactions with the Interested
Shareholder:
(i) a merger of the Issuing Public Corporation or any of its subsidiaries
with the Interested Shareholder or any of its affiliates or associates;
11
<PAGE>
(ii) a purchase, sale or other transfer of substantial assets other than in
the ordinary course of business between the Issuing Public Corporation
and the Interested Shareholder or any affiliate or associate;
(iii) the issuance of shares of the Issuing Public Corporation or any
subsidiary to the Interested Shareholder or any of its affiliates or
associates on a non-pro rata basis having a market value equal to 5% or
more of the market value of all of the outstanding stock of the Issuing
Public Corporation; or
(iv) the adoption of a plan of liquidation or reincorporation in another
state proposed by the Interested Shareholder or any of its affiliates
or associates.
(3) FAIR PRICE STATUTE
Section 302A.675 of the Minnesota Business Corporation Act (the "Fair Price
Statute") prohibits an offeror such as the Bidder or Mr. Fant from acquiring
shares of a publicly held corporation such as the Company within two years
following the last purchase of shares pursuant to a tender offer of the nature
of the Offer, unless the shareholder from whom the offeror is acquiring the
shares is offered a reasonable opportunity to dispose of the shares to the
offeror upon terms substantially equivalent to those provided in the earlier
tender offer. The only exception to the equal treatment requirement for
post-tender offer purchases arises if a committee consisting of all directors of
the Board of Directors who are not officers or employees of the Company or a
related organization and have not been officers or employees during the
preceding five years approves a post-tender offer acquisition of shares at a
lesser price before any shares are purchased pursuant to the tender offer.
For purposes of the Fair Price Statute, an offeror includes a person who
makes or in any way participates in making an offer other than persons such as
bankers, broker-dealers, attorneys, accountants and others furnishing
information or advice or performing ministerial duties for an offeror and not
otherwise participating in the tender offer. The definition further provides
that when two or more persons act as a group pursuant to any agreement,
arrangement, relationship, understanding or otherwise, whether or not in
writing, for the purpose of acquiring, owning or voting shares of a corporation
such as the Company, they are each a "person" for purposes of determining
whether they fall within the definition of an offeror.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1 Excerpts from the Company's Proxy Statement dated December 5,
1997.
Exhibit 2 Letter to Shareholders dated March 20, 1998.*
Exhibit 3 Press Release dated March 20, 1998 issued by the Company.*
- ------------------------
* Included in materials sent to Shareholders.
12
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
HEI, INC.
By /s/ Eugene W. Courtney
--------------------------------------
Eugene W. Courtney,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Dated: March 20, 1998
13
<PAGE>
EXHIBIT 1
SHARES AND PRINCIPAL SHAREHOLDERS
Only shareholders of record at the close of business on November 28, 1997,
are entitled to notice of and to vote at the meeting or at any adjournment
thereof. As of that date, there were 4,103,176 outstanding shares of Common
Stock of HEI, the only class of securities entitled to vote at the meeting.
Each shareholder of record is entitled to one vote for each share registered
in his or her name. Cumulative voting is not permitted.
The following table shows as of November 28, 1997 (as of February 14, 1997
with regard to FMR Corp.), information regarding the share ownership of each
person or group known to HEI to own beneficially more than 5% of the outstanding
Common Stock of HEI, each director or nominee to become a director of the
Company, each Named Executive Officer (as defined below), and all directors and
executive officers as a group. Except as otherwise indicated, the persons listed
in the table have sole voting and investment powers with respect to the shares
owned. Information regarding share ownership of persons other than directors and
officers is based on the records of the Company's transfer agent and on
information supplied to the Company by the holders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
--------------------------------
NAME NUMBER OF SHARES PERCENTAGE
- ----------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
FMR Corp. ......................................................................... 270,000(2) 6.6
82 Devonshire Street
Boston, MA 02109
Eugene W. Courtney................................................................. 157,740(3) 3.8
Kenneth A. Schoen.................................................................. 107,108(4) 2.6
William R. Franta.................................................................. 45,211(5) 1.1
Robert L. Brueck................................................................... 32,000(6) *
Frederick M. Zimmerman............................................................. 30,900(6) *
Jerald H. Mortenson................................................................ 97,197(6) 2.4
Dale A. Nordquist.................................................................. 59,064(7) 1.4
All directors and executive officers as a group (6 persons)........................ 529,220(8) 12.0
</TABLE>
- ------------------------
* Less than 1%
(1) Represents outstanding shares beneficially owned both directly and
indirectly as of November 28, 1997, including shares that may be acquired by
exercise of options either currently exercisable or becoming exercisable
within 60 days after November 28, 1997 ("currently exercisable options").
Percentage of class is shown to the nearest tenth of a percent.
(2) According to Schedule 13G dated February 14, 1997, filed jointly by FMR
Corp., Edward C. Johnson 3d and Abigail P. Johnson, control persons of FMR
Corp., Fidelity Management & Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp. and an investment adviser registered under the
Investment Advisers Act of 1940, and Fidelity Low-Priced Stock Fund (the
"Fund"), an investment Company registered under the Investment Company Act
of 1940, the Fund owns the shares indicated. FMR Corp., through its control
of Fidelity, Mr. Johnson, and the Fund each has sole power to dispose of the
shares. The Board of Trustees of the Fund has sole power to vote the shares.
(3) Includes 75,000 shares purchasable pursuant to currently exercisable option.
Also includes 46,974 shares held jointly with Mr. Courtney's spouse.
1
<PAGE>
(4) Includes 37,108 shares held in the name of the Kenneth Schoen Trust and
10,000 shares held in the name of VKS Ltd. Partnership, of which Mr. Schoen
is considered to be an indirect owner. Also includes 50,000 shares
purchasable pursuant to currently exercisable options.
(5) Includes 40,000 shares purchasable pursuant to currently exercisable
options.
(6) Includes 30,000 shares purchasable pursuant to currently exercisable
options.
(7) Includes 44,500 shares purchasable pursuant to currently exercisable
options.
(8) Includes 299,500 shares purchasable pursuant to currently exercisable
options.
DIRECTORS' FEES
The nonemployee directors receive $750 per quarter plus $700 for each
regular board meeting and $300 for each committee or special board meeting
attended. Each committee chairperson receives an annual fee of $300. For
services during the fiscal year ended August 31, 1997, $29,400 in directors'
fees was paid or accrued, in the aggregate, to the four nonemployee directors,
plus expenses.
DIRECTORS' STOCK OPTIONS
Under the Company's Stock Option Plan for Nonemployee Directors (the "1991
Plan"), an option to purchase 10,000 shares of Common Stock at an exercise price
equal to the fair market value (as defined) on the date of grant is granted each
year to all nonemployee directors then in office on the business day next
following the annual shareholders' meeting or April 1, whichever is earlier.
Awards under the 1991 Plan may be made to any director who is not a regular
employee of the Company or any subsidiary or affiliate. The options become
exercisable on the earlier of one year following the date of grant or the next
annual shareholders meeting, so long as the director is still serving on such
date, and terminate ten years following the date of grant. Upon the death or
disability of an optionee prior to the end of one year following grant, the
option will become immediately fully exercisable. Effective January 23, 1997,
each of the Company's nonemployee directors was granted an option to purchase
10,000 shares at an exercise price of $11.325 per share. These options become
exercisable on January 21, 1998, and are exercisable until January 23, 2007.
During fiscal year 1997, two of the nonemployee directors exercised options
to purchase a total of 20,000 shares, realizing aggregate net value of $135,125.
2
<PAGE>
ITEM NO. 2
APPROVAL OF INCREASE IN NUMBER OF SHARES AUTHORIZED FOR
1989 OMNIBUS STOCK COMPENSATION PLAN
The 1989 Omnibus Stock Compensation Plan (the "Plan") was adopted in April
1989. As originally adopted, and approved by the shareholders, 300,000 shares of
the Company's Common Stock were reserved for issuance under the Plan. In 1992
the Plan was amended to reserve an additional 900,000 shares for issuance under
the Plan. The Board has approved, and is recommending, an increase of 800,000 in
the number of shares that may be issued under the Plan.
PROPOSED INCREASE IN NUMBER OF SHARES
A maximum of 1,200,000 shares of Common Stock is currently authorized to be
issued under the Plan. As of the end of the 1997 fiscal year, all but 19,681 of
such shares had been issued or were subject to currently outstanding options.
Since adoption of the Plan in 1989, 531,750 shares have been issued upon
exercise of options, 330,324 shares have been issued to employees participating
in the stock purchase plan, and 24,745 shares were distributed as service awards
(a program discontinued in 1991). As of October 31, 1997, there were outstanding
options to purchase 292,000 shares. In addition, 20 employees were participating
in the employee stock purchase plan. The Board has authorized the grant of
options to purchase approximately 132,500 shares in December 1997, the
effectiveness of which will be conditioned upon shareholder approval of the
increase in the number of shares authorized for the Plan.
The Board of Directors believes that granting stock options and stock
purchase rights is important to motivate key employees to produce a superior
return to the shareholders of the Company. Both stock options and stock purchase
rights enable employees to acquire shares of the Common Stock of the Company,
thereby increasing their personal involvement in the Company, offering them an
opportunity to realize stock appreciation, and rewarding them for achieving a
high level of corporate financial performance. Stock options also enable the
Company to obtain and retain the services of certain key employees and are a
means of compensating employees of the Company without depleting the Company's
cash resources. In recent years, options have been granted to senior management
every three years, such options becoming exercisable over a three-year period.
The Board of Directors plans to continue this program by granting options in
January 1998. In order to have sufficient shares available for purchases under
the employee stock purchase plan, the options to be granted in December and
January, and for future awards, the Board has recommended that the number of
shares reserved and available for issuance under the Plan be increased by
800,000.
As of November 28, 1997, 4,103,176 shares of Common Stock of the Company
were issued and outstanding. During fiscal 1997, the Company repurchased 104,300
shares of Common Stock, in part to reduce the potential dilutive effect of the
issuance of shares to employees under the Plan. On November 21, 1997, the
closing price for the Common Stock on The Nasdaq National Market was $4 11/32
per share.
DESCRIPTION OF PLAN
In 1996 the Securities and Exchange Commission adopted new rules under
Section 16 of the Exchange Act that change the treatment of options and other
awards under Section 16 and impose different requirements for employee plans to
qualify for exemption from Section 16(b). In light of these changes, the Board
of Directors has adopted several amendments to the Plan to conform to the new
rules. Because changes to conform to the rules do not require shareholder
approval, this Proxy Statement will describe the material changes, but
shareholders will be voting only on the increase in the number of shares. A
summary of the Plan follows, but this summary is qualified in its entirety by
reference to the full text of the Plan, which is available from the Company upon
request. See "Availability of Report on Form 10-KSB."
3
<PAGE>
The Plan provides for grants of both incentive stock options, intended to
qualify as such under Section 422 of the Internal Revenue Code of 1986 (the
"Code"), and nonstatutory stock options, stock appreciation rights, restricted
stock, deferred stock, stock purchase rights, and other stock-based awards.
Except for the authority to grant incentive stock options, which expires in
1999, the Plan has no expiration date but may be terminated by the Board of
Directors at any time, subject to the rights of the holders of options or other
awards previously granted under the Plan.
Awards other than stock purchase rights may be made to "officers,
management, and other highly compensated employees" of the Company, its
subsidiaries and affiliates. Grants of stock purchase rights may be made to any
employee eligible under the terms of the Plan applicable to stock purchase
rights. As of October 31, 1997, the Company had 14 employees who fit within the
class of "officers, management, or other highly compensated employees" and 91
employees who may be eligible for stock purchase rights.
The following table sets forth as of October 31, 1997 the number of stock
options granted and stock purchase rights exercised by the Named Executive
Officers (see "Summary Compensation Table"), all current executive officers as a
group, and all employees as a group. No nonemployee director or other
nonemployee has received any grant under the Plan.
<TABLE>
<CAPTION>
TOTAL OPTIONS TOTAL STOCK
GRANTED UNDER THE PURCHASE RIGHTS
PLAN (#) EXERCISED (#)
------------------ ---------------
<S> <C> <C>
NAMED EXECUTIVE OFFICERS:
Eugene W. Courtney......................................................... 180,000 43,456
Jerald H. Mortenson........................................................ 145,000 28,889
Dale Nordquist............................................................. 117,500 38,750
ALL EXECUTIVE OFFICERS AS A GROUP (3 persons)................................ 442,500 111,095
ALL EMPLOYEES AS A GROUP (excluding executive officers)...................... 420,500 219,229
</TABLE>
The Board of Directors has authorized the grant of the following
nonqualified stock options in December 1997: Eugene W. Courtney, chief executive
officer, 30,000 shares; Jerald H. Mortenson, chief financial officer, 20,000
shares, Dale Nordquist, vice president of sales and marketing, 17,500 shares,
and to all other employees as a group 65,000 shares. The options will be granted
approximately one week following the publication of the Company's first quarter
earnings report at an exercise price of 85% of the Fair Market Value on such
date. The options will become exercisable one year after the date of grant and
will expire ten years following the date of grant.
SHARES SUBJECT TO THE PLAN
The shares of Common Stock that may be issued or transferred to grantees
under the Plan may be unissued shares or treasury shares. The Plan provides for
appropriate adjustment in the number of shares subject to the Plan and to the
grants previously made if there is a stock split, stock dividend, reorganization
or other relevant change affecting the Company's corporate structure or its
equity securities. If shares under a grant are not issued or transferred to the
extent permitted prior to expiration of the grant or an award is otherwise
forfeited, the shares will become available for inclusion in future grants.
ADMINISTRATION
As originally adopted, the Plan was to be administered by a committee of the
Board of Directors, the members of which met the definition of "disinterested
person" under Rule 16b-3 of the Exchange Act. To conform to the recent
amendments to Rule 16b-3, the Plan will be administered by the Board or a
committee composed of "non-employee" directors (as defined in the Rule). The
Board or committee will determine the participants, grant stock options, with or
without stock appreciation rights, and other awards, establish rules and
regulations for the operation of the Plan, and determine the price, term,
vesting
4
<PAGE>
schedule, number of shares and other terms of options and other awards. The
Board or committee may delegate its powers and duties to members of the
Company's administration with respect to participants who are not subject to
Section 16.
AWARDS AVAILABLE UNDER THE PLAN
STOCK OPTIONS. Options granted under the Plan may be in the form of either
options that qualify as "incentive stock options" ("ISOs") under Section 422 of
the Code or those that do not qualify as such ("NQSOs"). The term of an option
will be fixed by the Board or committee, but no option may have a term of more
than ten years from the date of grant. Options will be exercisable at such times
as determined by the Board or committee. The option exercise price will be
determined by the Board or committee at the time of grant but will not be less
than 85% of the Fair Market Value of the Common Stock on the date of grant (100%
of the Fair Market Value for ISOs). The grantee may pay the option price in cash
or, if permitted by the Board or committee, by delivering to the Company shares
of Common Stock already owned by the grantee that have a fair market value equal
to the option exercise price. The Code also places the following additional
restrictions on the award of ISOs. If an ISO is granted to a participant who
owns, at the date of grant, in excess of 10% of the Company's outstanding Common
Stock, the exercise price must be at least 110% of the fair market value on the
date of grant and the term of the ISO may be no more than five years from the
date of grant. The total fair market value of shares subject to ISOs which are
exercisable for the first time by any participant in any given calendar year
cannot exceed $100,000 (valued as of the date of grant).
Upon termination of an optionee's employment, unless otherwise determined at
or after grant, options will be exercisable for three months following
termination or until the end of the option's term, whichever is shorter. Except
in the case of incentive stock options, in the event of termination because of
the disability of the employee, stock options will be exercisable for the
remainder of the option's term. Upon death of an employee, stock options will be
exercisable by the deceased employee's representative for the shorter of the
remainder of the option's term or one year from the date of the employee's
death. Unless otherwise determined by the Committee, only options which are
exercisable on the date of termination, death, or disability may be subsequently
exercised.
STOCK APPRECIATION RIGHTS. The Board or committee may grant stock
appreciation rights ("SARs") in connection with a stock option granted under the
Plan. If a grantee exercises a SAR, the grantee will receive an amount in cash
or shares of Common Stock or a combination thereof (as determined by the Board
or the Committee) equal to the excess of the fair market value of the shares
with respect to which the SAR is being exercised over the option exercise price.
If a SAR is exercised in whole or in part, the right under the related option to
purchase shares with respect to which the SAR has been exercised will terminate
to the same extent. If a stock option is exercised, any SAR related to the
shares purchased will terminate. SARs are transferable only to the same extent
as the related option.
No SARs have been granted under the Plan.
RESTRICTED STOCK. Restricted stock may be granted alone, in addition to, or
in tandem with, other awards under the Plan and may be conditioned upon the
attainment of specific performance goals or such other factors as the Committee
may determine. The provisions attendant to a grant of restricted stock may vary
from participant to participant. In making an award of restricted stock, the
Committee will determine the periods during which the stock is subject to
forfeiture and may grant such stock for no consideration or such minimum
consideration as may be required by applicable law. During the restriction
period, the employee may not sell, transfer, pledge, or assign the Restricted
Stock. Certificates evidencing restricted stock will remain in the possession of
the Company until the restrictions have lapsed.
Upon termination of the employee's employment for any reason during the
restriction period, all or any portion of the restricted stock may vest or be
subject to forfeiture, in accordance with the terms and conditions of the
initial award. During the restriction period, the employee will have the right
to vote the
5
<PAGE>
restricted stock and to receive any cash dividends. At the time of award, the
Committee may require the deferral and reinvestment of any cash dividends in the
form of additional shares of restricted stock. Stock dividends will be treated
as additional shares of restricted stock and will be subject to the same terms
and conditions as the initial grant.
No restricted stock awards have been made.
DEFERRED STOCK. Deferred stock may be granted alone, in addition to, or in
tandem with, other awards under the Plan and may be conditioned upon the
attainment of specific performance goals or such other factors as the Committee
may determine. The provisions attendant to a grant of deferred stock may vary
from participant to participant. In making an award of deferred stock, the
Committee will determine the duration period and may award such stock without
payment therefor. During the deferral period, an employee may not sell,
transfer, pledge or assign the deferred stock award. At the end of the deferral
period, shares of Common Stock equal to the number covered by the award of
deferred stock will be delivered to the employee.
Upon termination of the employee's employment for any reason during the
deferral period, all or a portion of the deferred stock may vest or be subject
to forfeiture, in accordance with the terms and conditions of the initial award.
During the deferral period, and as determined by the Committee at the time of
award, amounts equivalent to any dividends that would have been paid had the
shares of deferred stock covered by a given award been issued will be paid to
the employee, or deemed reinvested in additional shares of deferred stock.
Deferred stock will carry no voting rights until such time as the stock is
actually issued.
No deferred stock awards have been made.
STOCK PURCHASE RIGHTS. The Plan provides for the grant to all Eligible
Employees (as defined) the right to purchase shares of the Company's Common
Stock through payroll deductions of any whole percentage between 2% and 10% of
Current Compensation (as defined) during any Purchase Period (as defined). An
"Eligible Employee" is any employee who has been in the continuous employment of
the Company since the January 1 preceding the beginning of any Purchase Period,
except that no employee who is employed fewer than 20 hours per week or who,
immediately after a right to purchase is granted, owns stock possessing 5% or
more of the total combined voting power of the Company (or any parent or
subsidiary), including stock that the employee may purchase pursuant to any
outstanding options, is eligible to participate. Each Purchase Period is the
period from April 1 to the next following March 31.
The purchase price for shares purchased pursuant to stock purchase rights is
85% of the lower of (a) the Fair Market Value on the first day of the Purchase
Period or (b) the Fair Market Value on the last day of the Purchase Period.
Stock purchased pursuant to stock purchase rights is intended to be eligible for
the favorable tax treatment provided by Section 423 of the Code.
Rights to purchase shares are not transferable otherwise than by will or the
laws of descent and distribution and are exercisable, during the employee's
lifetime, only by the employee. Following termination of employment, for any
reason, the employee (or the employee's estate) has a limited right to purchase
the shares paid for through the date of termination.
OTHER STOCK-BASED AWARDS. The Board or committee, in its discretion, may
grant other awards that are valued in whole or in part by reference to, or
otherwise based on the Common Stock, including, without limitation, performance
shares, convertible preferred stock, convertible debentures, or exchangeable
securities. Such awards may be granted in addition to or in tandem with stock
options or stock appreciation rights granted under the Plan. The Board or
committee may set such terms with regard to the vesting of such awards as it
deems reasonable.
6
<PAGE>
CHANGE IN CONTROL PROVISIONS
If there is a change in control of the Company, all awards, unless otherwise
provided in the related award agreement, will become fully exercisable and
vested. Stock options, SARs, restricted stock, deferred stock, stock purchase
rights, and other stock-based awards will, unless otherwise determined by the
Committee in its sole discretion, be cashed out on the basis of the change in
the control price, which will be the highest price per share paid in any
transaction reported on any market on which the Company's shares are traded or
paid or offered to be paid in any bona fide transaction relating to change in
control of the Company, at any time during the immediately preceding 60-day
period as defined by the Committee. A change in control occurs if (a) any person
becomes a beneficial owner directly or indirectly of 20% or more of the total
voting stock of the Company (subject to certain exceptions), or (b) during any
24-month period the individuals who comprised the Board of Directors of the
Company at the beginning of such period no longer represent a majority of the
Board (subject to certain exceptions), or (c) the shareholders approve an
acquisition of the Company by asset purchase, merger, or otherwise.
AMENDMENT
The Plan may be amended by the Board of Directors, except that the Board may
not, without the approval of the Company's shareholders, increase the number of
shares available for distribution, decrease the option price of an incentive
stock option below 100% of the Fair Market Value at grant, increase the rate of
payroll deductions for stock purchase rights to more than 15% of current
compensation, permit the issuance of stock prior to payment therefor, extend the
maximum exercise period for incentive stock options or extend the right to
exercise a stock purchase right to a date more than five years from the date of
grant, or change the class of employees eligible to receive awards under the
Plan.
TAX RULES
The following is a brief summary of the federal income tax rules currently
applicable to stock options and other awards that may be granted under the Plan.
This summary is not intended to be exhaustive and does not describe state or
local tax consequences.
STOCK OPTIONS. The grant of a NQSO will have no immediate tax consequences
to the grantee or to the Company. Upon the exercise of a NQSO, the grantee will
recognize ordinary income (and the Company will generally be entitled to a
compensation deduction) in an amount equal to the excess of the fair market
value of the shares of Common Stock on the date of the exercise of the option
over the option exercise price. The grantee's tax basis in the shares will be
the exercise price plus the amount of ordinary income recognized by the grantee,
and the grantee's holding period will commence on the date the shares are
transferred. Special rules apply in the event all or a portion of the exercise
price is paid in the form of stock.
Upon a subsequent sale of shares of Common Stock acquired pursuant to the
exercise of an NQSO, any difference between the grantee's tax basis in the
shares and the amount realized on the sale is treated as long-term or short-term
capital gain or loss, depending on the holding period of the shares.
The grant of an ISO will have no immediate tax consequences to the grantee
or to the Company. The exercise of an ISO by the payment of cash to the Company
will generally have no immediate tax consequences to the grantee (except to the
extent it is an adjustment in computing alternative minimum taxable income) or
to the Company. If a grantee holds the shares acquired pursuant to the exercise
of an ISO for the required holding period, the grantee generally will realize
long-term capital gain or long-term capital loss upon a subsequent sale of the
shares in the amount of the difference between the amount realized upon the sale
and the purchase price of the shares (i.e., the exercise price). In such a case,
no compensation deduction will be allowable to the Company in connection with
the grant or exercise of the ISO or the sale of shares of Common Stock acquired
pursuant to such exercise.
7
<PAGE>
If, however, a grantee disposes of the shares prior to the expiration of the
required holding period (a "disqualifying disposition"), the grantee will
recognize ordinary income (and the Company will generally be entitled to a
compensation deduction) equal to the excess of the fair market value of the
shares of Common Stock on the date of exercise (or the proceeds of the
disposition, if less) over the exercise price. Special rules apply in the event
all or a portion of the exercise price is paid in the form of stock.
SARS. No income will be realized by a participant and the Company is not
entitled to a compensation deduction in connection with a grant of a SAR. When
the SAR is exercised, the participant will generally be required to include as
taxable ordinary income in the year of exercise an amount equal to the amount of
cash and the fair market value of any shares of Common Stock received. The
Company will be entitled to a compensation deduction at the time and in the
amount included in the participant's income by reason of the exercise. If the
participant receives Common Stock upon exercise of a SAR, the post-exercise
appreciation or depreciation will be treated in the same manner as discussed
above regarding the tax treatment of NQSOs.
RESTRICTED STOCK. A participant receiving a restricted stock award
generally will recognize ordinary income in the amount of the fair market value
of the restricted stock at the time the stock is no longer subject to
forfeiture, less the consideration, if any, paid for the stock. However, a
participant may elect, under Section 83(b) of the Code within 30 days of the
grant of the stock, to recognize ordinary income on the date of grant in an
amount equal to the excess of the fair market value of the shares of restricted
stock (determined without regard to the restrictions) on the date of grant, less
any consideration paid. If the shares subject to a restricted stock award are
forfeited prior to the lapse of the restrictions, the participant is entitled to
a deduction or loss for tax purposes only in an amount equal to the
consideration paid for the forfeited shares regardless of whether he or she made
a Section 83(b) election. With respect to the sale of shares after the
forfeiture period has expired, the holding period to determine whether the
participant has long-term or short-term capital gain or loss generally begins
when the restriction period expires and the tax basis for such shares will
generally be the fair market value of such shares on such date. However, if the
participant has made an election under Section 83(b), the holding period will
commence on the date of grant and the tax basis will be equal to the fair market
value of shares on such date (determined without regard to restrictions). The
Company generally will be entitled to a deduction equal to the amount that is
taxable as ordinary income to the participant in the year that such income is
taxable.
Dividends paid on restricted stock generally will be treated as compensation
that is taxable as ordinary income to the participant and will be deductible by
the Company. If, however, the participant makes a Section 83(b) election, the
dividends will be taxable as ordinary income to the participant but will not be
deductible by the Company. If dividend equivalents are credited with respect to
deferred stock awards, the participant will realize ordinary income when the
dividend equivalents are paid and the Company will be able to take a deduction
at that time.
DEFERRED STOCK. A participant receiving deferred stock generally will be
subject to tax at ordinary income rates on the fair market value of the deferred
stock on the date that the stock is distributed to the participant and the
capital gain or loss holding period for such stock will also commence on that
date. The Company generally will be entitled to a deduction in the amount that
is taxable as ordinary income to the participant. Stock purchased pursuant to
stock purchase rights is intended to be eligible for the favorable tax treatment
provided by Section 423 of the Code.
STOCK PURCHASE RIGHTS. Stock purchased pursuant to the Purchase Plan is
intended to be eligible for the favorable tax treatment provided by Section 423
of the Code. A participant realizes no income upon the grant of the stock
purchase rights and no income upon purchase of shares pursuant to stock purchase
rights if he makes no disposition of the shares purchased within TWO YEARS after
the grant of the right and within ONE YEAR after purchase and at all times
during the period beginning with the date he becomes a participant and ending
three months before acquiring the shares he is an employee of the Company (the
"Disqualifying Disposition"). The Company will not be entitled to any
compensation
8
<PAGE>
deduction. Upon disposition of shares acquired, the participant will recognize
ordinary income on the lesser of (1) the excess (if any) of the Fair Market
Value on the date of grant over the purchase price or (2) the excess of the fair
market value on the date of disposition over the purchase price. The participant
will recognize capital gain (or loss) on the difference between the sale price
and the fair market value at either (1) the date of grant of the option or (2)
the date of disposition. Ordinarily, the Company receives no compensation
deduction for the amount recognized as ordinary income. However, upon a
Disqualifying Disposition the Company will be entitled to a compensation
deduction based upon the difference between the fair market value on the date of
disposition and the participant's purchase price for the shares.
The federal income tax treatment of other stock-based awards will depend on
the nature of any such award and the restrictions applicable to such award. Such
an award may, depending upon the conditions
applicable to the award, be taxable as an option or as an award of restricted or
deferred stock. In certain instances, a participant may be entitled to defer
recognition of income on the value of a grant of stock if the stock is subject
to substantial risk of forfeiture. The participant will be subject to tax at
ordinary income rates on the fair market value of the stock on the date that
income is recognized. The Company generally will be entitled to a compensation
deduction equal to the amount that is taxable as ordinary income to the
participant in the year that such income is taxable. With respect to the
subsequent sale of stock received, the holding period to determine whether a
participant will recognize long-term or short-term capital gain or loss will
generally begin when any restriction period expires (or the date on which the
participant recognizes income), and the tax basis for such shares will generally
be the fair market value of the shares on that date.
Certain limitations apply to the Company's deduction of compensation payable
to the person serving as its chief executive officer or to any of its four other
most highly compensated executives in office as of
the end of the year in which such compensation would otherwise be deductible. In
general, the Company may not deduct compensation, other than "performance-based"
compensation, payable to such an executive in excess of $1 million for any year.
The affirmative vote of a majority of the shares of Common Stock present and
voting on such matter is necessary for the approval of the increase in the
number of shares of Common Stock subject to the 1989
Omnibus Stock Compensation Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO INCREASE
THE NUMBER OF SHARES AUTHORIZED TO BE ISSUED UNDER THE 1989 OMNIBUS STOCK
COMPENSATION PLAN BY 800,000 SHARES OF COMMON STOCK. YOUR PROXY WILL BE SO VOTED
UNLESS YOU SPECIFY OTHERWISE.
9
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's chief
executive officer and the other executive officers whose total annual
compensation for fiscal 1997 (based on salary and bonus) exceeded $100,000 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION OTHER
FISCAL --------------------- ----------------- ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS/OPTIONS(1) COMPENSATION(2)
- --------------------------------------------- ----------- ---------- --------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Eugene W. Courtney........................... 1997 $ 164,900 $ 42,606 -- $ 4,727
Chief executive officer 1996 157,734 41,012 -- 4,496
1995 150,091 40,785 90,000 3,648
Jerald H. Mortenson.......................... 1997 $ 116,422 $ 20,052 -- $ 3,778
Chief financial officer 1996 111,348 19,301 -- 3,369
1995 105,946 19,194 60,000 2,401
Dale A. Nordquist............................ 1997 $ 96,546 $ 30,128 -- $ 3,778
Vice president of sales 1996 92,334 21,522 -- 3,249
1995 87,866 30,608 52,500 2,762
</TABLE>
- ------------------------
(1) The number indicated is the number of shares of common stock subject to
options granted in fiscal 1995, which become exercisable in three equal
annual increments commencing in January 1996 and will expire in January
2005.
(2) In each case, consists solely of Company matching contributions to 401(k)
plan.
OPTIONS GRANTED DURING FISCAL 1997
No options were granted to the Named Executive Officers during fiscal 1997.
AGGREGATED OPTION EXERCISES DURING FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by the
Named Executive Officers during fiscal 1997 and the number and value of options
held at fiscal year end. The Company does not have any outstanding stock
appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF
OPTIONS AT UNEXERCISED
FISCAL YEAR-END IN-THE MONEY
FISCAL OPTIONS AT
SHARES EXERCISABLE/ YEAR-END ($)(2)
ACQUIRED REALIZED(1) EXERCISABLE/
NAME ON EXERCISE VALUE UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ----------- -------------------- -----------------
<S> <C> <C> <C> <C>
Eugene W. Courtney............................... 15,000 $ 101,813 30,000/30,000 0 / 0
Jerald H. Mortenson.............................. 30,000 $ 145,250 10,000/20,000 0 / 0
Dale A. Nordquist................................ 8,000 $ 51,180 27,000/17,500 0 / 0
</TABLE>
- ------------------------
(1) Value realized is calculated as the difference between the fair market value
of the Common Stock on the date of exercise of the option and the option
exercise price multiplied by the number of shares acquired.
10
<PAGE>
(2) Value is calculated as the amount by which the closing price of the Common
Stock on August 29, 1997, which was $4 5/8, exceeds the option exercise
price ($4.7125) multiplied by the number of shares subject to the option.
CHANGE IN CONTROL AGREEMENTS
The Company has entered into agreements regarding employment/compensation
upon change in control (the "Agreements") with each of the Named Executive
Officers. The Agreements are operative only upon the occurrence of certain
changes in control of the Company. Absent a change in control, the Agreements do
not require the Company to retain the executive officers or to pay them any
specified level of compensation or benefits. Each Agreement provides that if,
within 24 months following a change in control, the executive officer's
employment is terminated by the Company other than for cause, on account of the
death, disability, or retirement of the executive, or voluntarily by the
executive (other than voluntary terminations following events that constitute
"good reason" (as defined in the Agreements, including compensation reductions,
demotions, relocations)), the executive is entitled to receive a lump sum
severance payment. The amount of the lump sum severance payment is equal to two
times the executive's "annualized includable compensation for the base period")
as defined in Section 280G(d) of the Code. The Agreements also allow the
executive to continue his participation in certain insurance and other benefit
plans of the Company for a period of two years following the date of his
termination. If a change in control of the Company had occurred and resulted in
the termination of a Named Executive Officer, giving rise to payments under
these Agreements as of August 31, 1997, the approximate amounts payable to the
Named Executive Officers would be as follows: Mr. Courtney, $383,090, Mr.
Mortenson, $254,164, and Mr. Nordquist, $234,760.
11
<PAGE>
Exhibit 2
Box 5000
1495 Steiger Lake Lane
Victoria, MN 55386
(612) 443-2500
Fax (612) 443-2668
[LOGO]
March 20, 1998
Dear Shareholder:
You have recently received an Offer to Purchase your shares of HEI, Inc.
Common Stock. Despite calls you may be receiving, you do NOT need to respond to
this offer, and the Board of Directors unanimously recommends that you NOT
tender your shares to the Bidder. The enclosed Schedule 14D-9 sets forth our
reasons for this recommendation.
In short, we believe you should NOT tender your shares because, among other
things:
- The offer is for only 11.5% of the shares.
- Mr. Fant has provided no meaningful information regarding his plans and
proposals for "maximizing value for all shareholders," despite the Board's
repeated requests. Instead, he decided to proceed with his offer and
impose on the Company the expense of responding.
- Mr. Fant has not explained why he needs complete control of the Board in
order for the Company to implement his plans and proposals or why, as a
less than 30% shareholder, he is entitled to control the Board.
- Mr. Fant's offer is conditioned on the Board taking certain actions,
including voluntarily giving him control of the Board although he has
given us no meaningful information regarding his plans, proposals or
nominees or explained why he is entitled to full control with less than
30% ownership. These conditions are Mr. Fant's, not the Board's. Mr. Fant
can waive these conditions. Your Board will not take action that would be
contrary to the interests of ALL shareholders. Moreover, Mr. Fant has
structured the offer in a manner that he should have known would be
unacceptable to the Board and the offer is so highly conditional that we
question whether he intends to purchase any tendered shares.
You shouldn't be confused by misleading claims Mr. Fant has made regarding
the Company in his offer and correspondence.
- For example, he attacks the Company's stock compensation program as
inappropriate when, in fact, the Company's compensation program is well
within industry standards. He also claims that only top management
benefits from these programs when, in fact, several other managers and key
employees receive stock options and all employees may participate in a
plan that allows them to purchase stock at a discount through payroll
deductions. The Company's compensation programs are designed and intended
to attract and retain qualified personnel in a tight labor market and were
carefully considered by the Board. Options granted to the independent
directors (three of the four current directors) have been at market value,
and your directors will be rewarded only if the Company prospers.
- In addition, his claim in a recent letter to shareholders that you will
receive an immediate 25% cash premium over the recent market price fails
to point out that only 11.5% of the outstanding stock will receive $8 per
share--the remaining 70% will receive NOTHING from the offer, and have
been provided no information regarding the future of the Company under Mr.
Fant's management.
- Mr. Fant also attacks the Company's operating results despite 26 straight
profitable quarters under current management of the Company (until the
loss in the first quarter of fiscal 1998) and annual
<PAGE>
revenues growing from just under $9 million in fiscal 1990 to $31 million
in fiscal 1997. Fiscal 1997 was the Company's best year ever--for both
revenues and earnings. The stock price dropped following the unexpected
announcement in March 1997 that the Company's biggest customer was taking
its business in house and "offshore." Management has taken aggressive
action to address this development, and in the second quarter of fiscal
1998 the Company returned to profitability, in part as a result of new,
replacement business. The Board has complete confidence in your management
and believes that Mr. Fant may be attempting to exploit this recent loss
of a major customer as well as being attracted to the $13 million in cash
that HEI has accumulated since 1990.
The Board of Directors, after considering the information provided and the
demands made by Mr. Fant, UNANIMOUSLY RECOMMENDS that you reject the offer and
not tender your shares. Our concern is the welfare of all of the Company's
shareholders, and we view this offer (and its consummation) to be detrimental to
those interests.
If you have any questions or concerns regarding the offer or the Board's
recommendation, please contact Eugene W. Courtney, President and Chief Executive
Officer, or Jerald H. Mortenson, Vice President--Finance and Administration, at
(612) 443-2500.
Sincerely,
HEI, Inc. Board of Directors
Robert L. Brueck
Eugene W. Courtney
William R. Franta
Frederick M. Zimmerman
REMEMBER, you do NOT have to tender your shares or RESPOND in any way to the
offer. If you have tendered your shares, you have the right to WITHDRAW them.
The procedure for withdrawing previously tendered shares is described in Section
3, page 13, of the Offer to Purchase dated March 10, 1998.
<PAGE>
Exhibit 3
PRESS RELEASE
For Immediate Release March 20, 1998
HEI Announces Response to Unsolicited Tender Offer
Minneapolis, MN--HEI, Inc. today filed a Schedule 14D-9 with the Securities
and Exchange Commission containing its response to the offer by Fant Industries
Inc., a company wholly owned by Anthony J. Fant of Birmingham, Alabama, to
purchase 11.5% of the Company's outstanding shares at a price of $8.00 per
share. The Company's Board of Directors has unanimously recommended that the
shareholders reject the tender offer. The Board stated, "Our concern is the
welfare of all of the Company's shareholders, and we view this offer (and its
consummation) to be detrimental to those interests."
Among the reasons cited for the Board's decision are the following:
- The offer is for only 11.5% of the shares.
- Mr. Fant has provided no meaningful information regarding his plans and
proposals for "maximizing value for all shareholders," despite the Board's
repeated requests. Instead, he decided to proceed with his offer and
impose on the Company the expense of responding.
- Mr. Fant has not explained why he needs complete control of the Board in
order for the Company to implement his plans and proposals or why, as a
less than 30% shareholder, he is entitled to control the Board.
- Mr. Fant's offer is conditioned on the Board taking certain actions,
including voluntarily giving him control of the Board although he has
given the Board no meaningful information regarding his plans, proposals
or nominees or explained why he should be given full control of the Board
when he would own less than 30% of the stock. These conditions are Mr.
Fant's, not the Board's. Mr. Fant can waive these conditions.
- The offer is so highly conditional that the Board questions whether Mr.
Fant intends to purchase any tendered shares.
The Board also cautioned the shareholders that they are not required to
respond to the offer and can withdraw any shares they may have previously
tendered.
HEI is a Minnesota-based company specializing in the design and manufacture
of ultraminiature microelectronic devices and high technology products
incorporating those devices. The Company's stock trades on the Nasdaq National
Market under the symbol HEII.
# # #
For further information, contact Eugene W. Courtney, President and Chief
Executive Officer, at HEI, Inc. (612) 443-2500.
